Is Ghana a developed or developing country

Processing the raw materials locally is not a panacea for developing countries

It is often propagated that resource-rich countries have to process their natural resources in the country in order to benefit from the added value and to escape the resource curse. But this strategy is not always promising.

It is generally assumed that the key to Africa's economic development lies in the processing of its raw materials. The crux of the current situation, it is argued, is the one-sided dependence on natural resources and their export. The continent is becoming a supplier of crude oil, diamonds, metals, but also of food or materials such as wood or cotton, while the actual value creation happens elsewhere. Sometimes it is also suggested that there is an intention of the multinational companies or "the West" to keep Africa in the dependent role of the pre-industrial supplier.

The argument is exacerbated by the accusation that the raw materials are generally far too cheap, partly as a result of corrupt deals, for example when it comes to concessions, licenses and taxes in Congo-Kinshasa. You quickly come to the finding of a general resource curse, which is supposed to be responsible for the widespread pension economy, corruption and the little initiative entrepreneurship. Although both experts and African governments are trying to promote the processing of the raw materials on site, this process is slow to get going. Is that due to the market power of western (or Chinese) companies that do not want to give up the lucrative refinement of the materials? In short: in generally unjust global trade relations?

High effort, little added value

More recent research paints a different picture. Accordingly, for countries that are primarily dependent on raw materials, there is little prospect of development in relying on processing them domestically. This is mainly due to two factors: Firstly, transport - especially by sea - is so cheap nowadays that it makes little financial difference for companies whether raw materials have to be transported far or not. This means that a raw material deposit does not in itself represent a location advantage for further processing. More important are the energy costs, for example for the smelting of metals. Second, the processing is relatively expensive and in some cases technically demanding, also because the metals have to be more and more pure, apart from other increasingly strict standards and norms; the processing creates a smaller added value than one might think.

Where the copper value is drawn

Dollars per ton at various stages of processing

In an article published last year, the two experts Olle Östensson and Anton Löf summarized the state of research on this question, which is particularly crucial for developing countries. In the text under the title “Downstream Activities”, they list the conditions that must be met so that raw material processing on site is worthwhile. The availability of inputs, especially energy, is important. For example, aluminum or copper smelters need a lot of electricity, and cheap, in order to be competitive.

In countries with bauxite or copper deposits, however, there is often a lack of power supply. In addition, supply chains are generally required: water and other required raw materials, machines, spare parts, technical services for maintenance and repairs must be available, but also infrastructure, transport, logistics, means of communication, trained personnel and financial services, not to mention legal security, property protection and political Stability. Because the manufacturing industry requires high investments that only pay for themselves over a long period of time. This is also due to the economies of scale: Oil refineries or aluminum factories are only profitable if they have a relatively high production volume. Processing the output of a small oil field or mine locally is generally not worthwhile.

Proximity to the sales market is important

Another condition for profitable processing is the existence of a local market. There should ideally be a demand for the products in the country. These sales opportunities do not exist in most of the raw material producing countries in Africa. If this condition is not met, the main sales market should be at least nearby; because the industrial buyers of semi-finished products are dependent on fast delivery. Proximity to the market is more important than proximity to the production site. This is a major disadvantage for remote landlocked countries such as copper-producing Zambia.

It is often argued that developing countries would be “kept small” by an unjust customs policy by receiving international incentives to export only raw materials and no processed products. As a result, they are forced to export their mineral resources cheaply and then to import the end products again for expensive money, because the actual value creation takes place in the rich countries (so-called Singer-Prebisch hypothesis). There are now a few examples that point in exactly the opposite direction. In Australia, for example, bauxite mined is smelted in Mozambique, partly because energy costs are lower there. Canada, a highly developed country, also exports unprocessed raw materials. Östensson and Löf also find little evidence for the Singer-Prebisch hypothesis in today's global economy, because firstly, raw material prices have risen, secondly, due to the rise of China and India, the world is no longer simply divided into two parts, and thirdly, many poor countries are now duty-free Access to the markets of developed countries can benefit.

In short, if raw materials are processed at the point of extraction instead of being exported directly, the volume of goods exported is reduced and transport costs are reduced. But in view of the relatively cheap ship transport, this location advantage compared to the disadvantages mentioned above is no longer significant today.

Quite a few African governments have committed themselves to developing a manufacturing industry for their mineral resources, but little has been implemented so far (an exception is manganese processing in Gabon). This may have to do with a certain inertia on the part of the governments in resource-rich countries, who live quite well on the rents from resource exploitation and have little incentive to launch complex industrial projects. But perhaps the restraint also testifies to economic rationality, since the relationship between expenditure and income is less favorable than with the mere extraction of natural resources.

What is slowing down industrialization

One can ask oneself whether raw material processing on site at least creates jobs or incentives for education or contributes to economic diversification. Here, too, the authors' findings are negative. Manufacturing industries are capital but not labor intensive. The need for unskilled labor in this area is low, in contrast to the mining or extraction of the raw materials themselves. The manufacturing sector definitely needs highly qualified specialists. However, their number is too small for on-site training, for example in the form of establishing a technical university, to be worthwhile. Theoretically, the construction of a processing factory could provide impetus for suppliers or for the further processing of the products, but as long as the other factors mentioned, such as energy supply or infrastructure, are missing, this is rather unlikely.

Some governments try to force the process of processing by banning the export of unprocessed raw materials or making it more difficult with punitive tariffs. But that means bridling the horse from the tail. In Gabon there have been such attempts in the timber industry. However, as long as the economic environment is not right, processing cannot be enforced by prohibitions. Occasionally, a ban simply means that the materials are no longer exported at all or are exported via smuggling routes.

It is undoubtedly beneficial for countries to move away from one-sided dependence on their raw materials and diversify their economies, including through industrialization. However, the processing does not necessarily have to involve locally extracted raw materials, for which the profit margin is also relatively small. Each country has different locational advantages and disadvantages. The central point is that prices that are customary in the world market and that are not distorted by corruption are paid for the mining and that the money does not disappear into the pockets of individual profiteers, but is used to create the conditions for economic development. That means that the money would have to be used for education, for infrastructure, water and electricity supply and the establishment of reliable institutions.